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When you hire new employees, ensuring they complete a W-4 should be one of the first administrative items on your checklist. And while the IRS recommends employees submit a new W-4 each year, most employees don’t typically review their W-4 or make adjustments unless they’ve experienced a life-changing event such as getting married or having kids.
However, in January 2020, the IRS changed the W-4 in an effort to more accurately calculate withholdings.
Read on to find out more about the W-4, how it changed, and what your employees should know about these changes.
What is the W-4?
Before we delve into the tax reform changes, let’s review the purpose of the W-4. The W-4 is an IRS form that your employees complete so you know how much money to withhold from their paychecks for federal taxes.
The form, which is also known as the Employee’s Withholding Allowance Certificate, is based on the idea of “allowances.” The more allowances your employees claim, the less you can withhold from their paycheck. For some examples, your employees can claim allowances if:
- No one else claims them as a dependent
- They are single and only have one job
- They have a spouse
- They have dependents
If your employees accurately calculate their withholding allowances, they can avoid a big tax bill when April rolls around. They can also avoid overpaying taxes, so they have more money available throughout the year.
When do your employees fill it out?
All employees should fill out a W-4 when they start a new job (if not beforehand), as the form should be effective for their first wage payment. Employees should fill out a new W-4 if they’ve had a change to their financial or personal situation, such as:
- Getting married
- Having a child
- Adopting a child
- Losing or gaining household income (e.g., a spouse losing or getting a job)
These are specific situations in which an updated W-4 is necessary. However, if your employee already has a W-4 on file from 2019 or any prior year, they do not need to fill out a new 2020 W-4 just because the form changed. Starting January 1, 2020, any new hires or employees with life changes need to complete the 2020 W-4.
What is new on the 2020 W-4
The new 2020 Form W-4 is broken up into five steps. Each step asks questions and the employee is expected to enter dollar amounts as the answers. This is different from the old form that used a worksheet with number values to help you calculate your withholding amount.
The five steps are:
- Personal information
- Multiple jobs or spouse work
- Other adjustments
Although you shouldn’t offer advice on your employees’ withholding calculations, you should be prepared to help them navigate these new sections on the form. See our guidance for each step on the 2020 Form W-4 for more information.
How can you help your employees?
Because this is a new form, your employees may need some additional guidance as they calculate their withholding. They should use the IRS withholding calculator as well as the IRS FAQs to determine how to fill out this form what their withholding should be.
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